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Do firms with short-term investors spend less on long-term investment?
Finance / 25. Januar 2016
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Professor für Finance Leiter Finance Department
Zacharias Sautner ist Professor of Finance und Leiter des Finance Department an der Frankfurt School of Finance & Management. Seine Forschung wurde in führenden internationalen Fachzeitschriften wie dem Journal of Finance, dem Review of Financial Studies oder dem Review of Finance veröffentlicht. Er lehrt auf den Gebieten Corporate Finance, Unternehmensbewertung und Corporate Governance. Er hat verschiedene Forschungs- und Lehrpreise gewonnen.

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Recent survey evidence suggests that many executives are willing to take short-term actions that are detrimental to long-term firm value, such as cutting long-term investments. It is often argued that these myopic actions are taken in response to pressures by short-term investors. For example, Nobel laureate Edmund S. Phelps is concerned about the effects of short-horizon investors for long-term economic development, arguing that in “…established businesses, short-termism has become rampant.

In a new study, me and my coauthors Martijn Cremers and Ankur Pareek study the effects of short-term investors on long-term investment and firm valuations.  Our empirical proxy for the presence of short-term investors is a new measure of the stock holding duration of institutional investors. This measure, called Stock Duration, is calculated as the weighted-average length of time that institutional investors have held a stock in their portfolios.

We first study whether firms spend less on R&D, our proxy for long-term investments, and report higher earnings in the presence of short-term investors. We focus on R&D expenses, as these are investments whose benefits are likely manifested only in the long-run, while their expenditures depress current earnings. In particular, as R&D spending is expensed directly on a firm’s income statement, a reduction in these discretionary expenditures allows the firm to report higher current earnings. This can boost the firm’s stock price in the short term, if investors naïvely use earnings-based multiples to derive their estimate of firm value or misinterpret positive earnings surprises that result from R&D cuts. Therefore, any pressure from short-term investors may cause executives to reduce R&D to report higher earnings, and markets may not be able to immediately determine whether such R&D reductions are suboptimal due to asymmetric information.

Using our Stock Duration measure, we document that firms cut R&D spending, report higher earnings, and generate positive earnings surprises when short-term investors enter as shareholders. Furthermore, the increased presence of short-term investors tends to be temporary only and reverses after a few years. Consistent with this pattern, we find that both R&D expenses and reported earnings reverse when the inflow of short-term investors also reverses, confirming that the effects from temporary increases in short-term investors are only transitory.

We then show that these changes in the presence of short-term investors are related to firm valuations. As short-term investors move en masse into particular stocks, their equity market valuations increase substantially relative to fundamentals—but only temporarily. Contemporaneously, a standard-deviation decrease in Stock Duration (0.7 years) is associated with an increase in the market-to-book ratio of 13%. More importantly, this large valuation increase is followed by a predictable decline in the market-to-book ratio. Economically, a standard-deviation decrease in Stock Duration this year is associated with a decrease in next year’s market-to-book ratio of 9%. The market-to-book ratio then reverses to its initial level over the subsequent year. This predictable reversal is consistent with the previous valuation increase reflecting overvaluation.

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